Question

On January 1, 2020, Ivanhoe Co. borrowed and received $520,000 from a major customer evidenced by a zero-interest-bearing note due in 4 years. As consideration for the zero-interest-bearing feature, Ivanhoe agrees to supply the customer’s inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 9%.

(a)		Prepare the journal entry to record the initial transaction on January 1, 2020.
(b)		Prepare the journal entry to record any adjusting entries needed at December 31, 2020. Assume that the sales of Ivanhoe’s product to this customer occur evenly over the 4-year period.

Please explain the process of getting to the answer, thanks!

Answer 1

Date	Account Titles and Explanations	Debit	Credit
January 1, 2020	Cash	$520,000
	Discount on Notes Payable	$151,616		[$520,000 - ($520,000 x PV of $1 9%, 4)]
	Notes Payable		$520,000
	Unearned Sales Revenue		$151,616
December 31, 2020	Interest Expense	$33,155		[($520,000 x PV of $1 9%, 4) x 9%]
	Discount on Notes Payable		$33,155	[$368,384 x 9%]
December 31, 2020	Unearned Sales Revenue	$37,904		($151,616/4 years)
	Sales Revenue		$37,904